Financials

It looks like Financial stocks took the brunt of today's dive. Here are a few I looked at.

 Barclays (BCS) as you can see took the biggest hit since 8/19. This is the change of character that really matters, although this week there have been many more subtle signs.

 Goldman Sachs (GS) took the biggest plunge since early August.


 Despite the problem's Jefferies (JEF) had last week with their exposure, which halted trading several times, this is the biggest decline I can find on this entire chart. Obviously all of the statement and this weekends purge of 50% of their EU exposure wasn't enough to satisfy investors. This is exactly what I was talking about in last night's post, a lack of trust is when all hell breaks loose.

 JP Morgan Chase-the biggest decline since 8/8, the difference is that in August, the drop was a bullish capitulation move, today's plunge was a bearish breakaway move-BG DIFFERENCE moving forward.

 Morgan Stanley (MS) the biggest plunge since early August.

 XLF has been giving us plenty of warning, the length of the divergence is just reflective of how bad the distribution and short selling has been. The bear flag at the white arrow saw a leading negative divergence, this is one of the reasons why I have refused to let go of any short positions.

As for Financials more broadly, XLF shows the worst decline since 8/10-again a capitulation move back then.

Judging by the overnight ES action, I'm fairly confident in saying that this EU plan to rid themselves of the pigs has been inside knowledge that the market has been aware of on some level and the extreme rally was a chance to fill the gap (make back lost money) as well as set up their portfolios for the next leg down which should be substantial based on the 3C readings.

If this move down today was because of an Italian margin hike on bonds, I'd be shocked, I think Wall Street knew that Mer-Kozy were set to let the cat out of the bag as Sarkozy was talking openly at a university about it yesterday.

Here's the overnight ES action aping off what I have called and believed to be a "sucker's rally".

ES shows a clear negative divergence that sent ES lower shortly after it started. I believe the bond margin hike was a cover for what they knew was coming out later today.

Here's the effect of a sucker's rally and how it is more or less a longer version of a head fake or you might all it a bull trap. I have shown over the last several days churning events where strong hands have  turned over long positions to weak hands and yesterday was a rally based on pure news and momentum, as I showed, there was no accumulation for it, so it was convenient for Wall Street.

 Anyone who went long in the white box, which would be a lot of people, are now at a loss as of the close, this is a lot of overhead resistance and the further the market moves down, the greater their loss will be, which will cause them to sell and change the dynamics of supply and demand by creating more supply in an environment that already has little demand, this in turn means (if you have ever watched level 2 or even better TotalView) that there will be a certain amount of bids at one level, when those are exhausted, price moves down to the next level where there are bids. However, the wave of supply will far outstrip demand and we get the snowball effect. That is the reason bear flags exist and a bear flag is what we have seen in the market over the last 6 days.

What Mer-Kozy did today should have them in the Hague, the effect that has not even come close to starting will be of extreme hardship for their "fellow" Europeans and across th globe and without any sense of hyperbole, we will be lucky to get through their intended plan s without a lot of blood being shed. It might just turn out that the Greeks who have been hanging posters of Merkel in a Nazi uniform with the EU armband may have been a lot closer to reality then we can imagine. I hate to throw around words like that and I don't do so lightly, but what they did today was a betrayal to the entire EU and a betrayal of confidence and trust for the entire world.

The IWM

 The IWM breaking the recent top

 Here's a closer look. Again, 1 p.m. is the key and that's when the Reuters article came out. As I try to remind people, 3C shows us what smart money is doing, but if you want the reason, you'll likely have to wait. Looking at the gaps in financial stocks, my best guess is that the margin hike in Italian bonds had nothing to do with the opening gaps down or very little. We are WAY behind the information curve and Mer-Kozy's plans to rid the EU of pigs is much further along then a recent idea mentioned yesterday, we see that with every follow up press release.  I would not be surprised at all if what we have been seeing in these VERY negative 3C readings for some time (and remember, the longer and deeper the divergence, the worse the eventual reversal will be as it signals more and more selling/short selling) the divestment of institutional money because of this fact. There is other evidence I will talk about tonight.

Here's the IWM's long term trend line broken

SPY breaking important support

 Here's the recent trend line for what I would term as the October rally top.

Here's the SPY breaking below it on volume.

The SPY is down nearly 4% today and this may just continue. I would encourage you to re-read last night's post, take a longer view of the markets and be realistic about what a bear market looks like and how it trades, remember, typically you have more up days then down days in a bear market, the down days like today, are just much worse then the up days, but you should not think that the market will simply fall straight down, no bear market has ever done that. So keep your eye on the trend and the important changes taking place and try to get use to a little ambiguity in the market, if you an't tolerate ambiguity, you can't trade.

Financials

Recently we hve been taking trades that are market directional because there isn't a trend that will allow for rotation and stock picking, but I just said this week, the first place that may be an exception would be financials, especially those with European exposure.

Mentioned on Monday, BLK which if you had shorted at any point during Monday or since, you'd already be at a profit.

Also on Monday, Barclays, BCS , again, having shorted it at any point since then and including at the time I called this a sucker's rally, you would be at a profit today as it is down over 10%.

Let's take a look.

Barclays-BCS

 This is the weekly chart, BCS seems to be starting its next leg down and they do have exposure to toxic EU debt.

 The red arrow is when BCS was featured, at a 10+% loss today, I think that the drop in financials signals that something much worse then a margin hike on Italian bonds was brewing. We are so far behind the information curve and Germany and France's plans to rid the EU of all PIGS seems to be a lot further along the road then the initial articles suggest, this may in fact be the reason we have been seeing what I have called some of the worst 3C readings I have ever seen. It just so happens that today, the EU let the cat out of the bag.

 BCS hourly chart-there's been great confirmation on the way down, the fact that BCS was in a leading negative divergence during the rally tells me something, sucker's rally indeed, just a lot bigger then we may have originally thought.

BlackRock- BLK

 BLK is near the neckline of a multi-year top, the implied downside once the neckline is broken is about, you won't believe this, but about 100 points lower.

 BLK recent 5 min 3C action in to the recent bear flag rally, it looks like it was sold/shorted the entire time, the very reason bear flags exist.

 Here is FAZ, which I have held on to in the model portfolio. There has been an outstanding positive divergence on the long term 30 min hart, leading positive in fact. I don't plan on letting go of this position any time soon.

 FAZ 15 min chart shows a very positive divergence in to the recent bear flag and before, it's now leading positive in a single day.

Jefferies-JEF

 Despite what "seems" like JEF cleaning up their exposure, remember we are in a time when no one trusts anyone about their exposures. The long term 6 day chart of JEF implies big problems ahead.

 Again, an hourly hart with near perfect downside confirmation, which is excellent for the reliability of divergent signals, look at the performance of 3C as JEF put in an island top.

 We have confirmation on the 30 min chart too and judging by 3C today as well as the 8+% loss, I think it is safe to say the market still has doubts about their exposure to the EU.

On a shorter timeframe, JEF didn't participate very much in the recent run up, it was negative at the top and the short term 2 min chart is leading negative today.

I for one am glad to have exposure on the short side to financials.

It Looks Like the Reuters Story Is NOT a Rumor

Bloomberg just reported the following:


Equities extended losses as Handelsblatt reported that German Chancellor Angela Merkel’s party wants to make it possible for European nations to exit the euro area.


German Chancellor Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

RMBS patents ruled invalid German Chancellor Angela Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

A commission within the party, that is crafting a framework to be presented at a party meeting, has proposed allowing a euro member who doesn’t want to or isn’t able to comply with the common currency rules to leave the euro region without losing membership in the EU, the newspaper said.

Apparent Market Reaction/Update

 The reaction in the DIA since the article-now off -3.20%

 IWM reaction now off 4.02% (I guess my half joke last night about the market being down 5% today wasn't too far off)

 QQQ now off -3.3%

 SPY now off -3.35%

 Euro breaking to new lows unambiguously after the print from Reuters.

 FXE/Euro

 FXE 1 min 3C chart plunging.

 UUP/$USD moving up quickly

 The longer term strength I've pointed out in the $USD on a strong positive divergence makes me wonder when inside information about this was truly known.

 ES way off the VWAP from earlier and on volume.

 TLT-Treasuries catching a 1 pm safe haven bid

 TLT 1 min 3C rocketing up.

 USO now close to the $36.50 level having given up significant gains on broad dollar stength.

 USO 5 min 3C leading negative divergence.

USO 10 min approaching a new low in a leading negative divergence, SCO might just be a trade after all.

Reaction

The Reuters article I just posted came out around 12:54 EDT, however Sarkozy spoke of this yesterday to I believe a university. I have to question whether today's plunge was actually due to the increase in Italian bond margin or something far more disturbing. In any case, as this makes it's way around the trading desks of the world, I'm quite sure the debate is raging over how to best re-position risk. This feels like the calm before a hurricane of volatility as an announcement like that is sure to force trading desks and portfolio managers to reconsider their positioning which has been based up until an hour ago on what is known to the reality of the many different ways this new unknown could play out.

The Winner- You Don't Want to Skip This Post

Last night I mentioned some of the hallmarks of a crumbling market: The speed of news and amount, rumors, lies, and mistrust.

Today, as per Reuters, we may have the winner that encapsulates all of the above mentioned dynamics:

(Reuters) - German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say.


As mentioned last night, Mer-Kozy may have made their biggest recent misstep at the recent G20 summit when they said something long the lines of, "Greece is free to leave the EU" and in doing so, they opened a box that can't be shut. Who will invest in any thing EU related, whether it be the EFSF, individual countries including Germany and France, or the financial system when the biggest supporters of keeping the EU bloc enacted have suddenly opened the door to a country leaving? Where's the consistency? Where's the trust? Imagine for a moment that Greece, the first or second most likely candidate where to leave the EU and re-issue drachma and in essence, default on all bonds. The contagion from that event would hit every financial institution in every country in the EU and beyond. Who would invest capital in any of these institutions when there's no guarantee that a 50% haircut doesn't become a 100% loss which would trigger all kinds of ramifications?


We have just gone from a bad idea (the creation of the EU) to the nightmare of ideas and it seems to be beyond academic as Wikileaks exposed last week with their cable that Germany is preparing to leave the EU.


It just got a LOT worse. EXCERPTS from the article (comments to follow below):


French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future.


The discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the euro zone, while the remaining core pushes on toward deeper economic integration, including on tax and fiscal policy.


"This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years," one EU diplomat told Reuters. "This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it."


"France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.


"We need to move very cautiously, but the truth is that we need to establish exactly the list of those who don't want to be part of the club and those who simply cannot be part.


One senior German government official said it was a case of pruning the euro zone to make it stronger.

"We won't be able to speak with one voice and make the tough decisions in the euro zone as it is today. You can't have one country, one vote," he said, referring to rules that have made decision-making complex and slow, exacerbating the crisis.

Speaking in Berlin on Wednesday, Merkel reiterated a call for changes to be made to the EU treaty -- the laws which govern the European Union -- saying the situation was now so unpleasant that a rapid "breakthrough" was needed.

EU officials have told Reuters treaty change will be formally discussed at a summit in Brussels on December 9, with an 'intergovernmental conference', the process required to make alterations, potentially being convened in the new year, although multiple obstacles remain before such a step is taken.

"This is something that has been in the air for some time, at least in high-level talks," said one EU diplomat. "The difference now is that some countries are moving forward very quickly ... The risk of a split, of a two-speed Europe, has never been so real."

"Intellectually speaking, I can see it happening in two movements: some technical arrangements in the next weeks to strengthen the euro zone governance, and some more fundamental changes in the coming months," the senior EU official said.

I think this is the headline that will eventually be remembered as, "Game Over". The economic ramifications are incalculable, but that has never stopped the EU from making hasty, horrible decisions. Beyond the economic fall-out which will be world-wide and make sub-prime look like what it is in comparison, the loss of a home vs the loss of a continent. Can you imagine the animosity from countries that were left out in the cold to fail on their own and how many ways that could backlash. The political fall out would be unimaginable and the world strategic map would change radically. I can imagine the Russians coming to the aid of Greece in return for a naval port on the Mediterranean. China's global ambitions and the currency reserves they have to back them, would suddenly be like the biggest, most unfathomable dream come true. The Eastern European Bloc would likely be under threat from an expansionary threat from Russia's Putin who we all know wants to see the Soviet Union rise back up from the ashes after 2 decades of European and American influence making in roads in to their former satellite states. I've known since I was 20 years old that I would live to see unbelievable historic events, 9/11 sadly was one of them, but serious thought about the ramifications of what is not only being proposed, but apparently acted on, defy the collective imagination and I don't think you can call me paranoid to say that this could very well lead to the 3rd World War, once again on the European continent led by the same crew as the first two. 

Whatever the market does in the next weeks and months, I truly believe this, today, was the game changer and I believe it will be reflected in the market in a way we have never seen before. If the market hates uncertainty, the EU just served up the biggest plate of uncertainty possibly in the last century or more. I can not stress enough how unbelievable this news is and how much of a detrimental effect it will have, even if the plan is suddenly halted and totally shelved, the cat is out of the bag and mistrust just hit new all time levels.

Using Traditional Tools

Her's a few other measures you can watch using traditional moving averages and a few other indicators to track changes of character in the market. Remember to compare everything you can, FX, commodities, treasuries, you never know where you'll find an important indication that others have missed.

 A 50 bar EXPONENTIAL moving average on a 60 min chart has tracked the rally well and acted as support and resistance.

Here's a closer view of today.

You should have access to the intraday NYSE TICK chart, this will often give you early warning of a change in the short term trends.

Make sure to draw some trendlines that define the trend in the TICK chart (Number of NYSE advancing issues minus the number of NYSE declining issues). As you can see, it tracked the 10:30 a.m. bounce well until it started to break below the channel around 11:45 a.m. As you can see below, it's a pretty accurate measure for short term trends. Also watch the readings, the red arrow is neutral at zero, readings below -1000 or above +1000 are significant, at 1250-1500 they are very significant.

Trend in the SPY breaks, however the TICK chart gave slightly advanced warning.

Wilder's Relative Strength (not to be confused with Relative Strength) on a 1 min chart also gives good insight, note the negative divergence in to the EOD trade yesterday as well as the rally this morning, you are looking for negative or positive divergences the same way 3C is used.

MACD Histogram can also work, but you must set the timing to the trend you are following, a daily MACD chart will tell you nothing about an intraday trend, you're better off watching a 1 min chart.

Also trendlines can be used. I prefer to stay away from indicators like Stochastics which can remain pinned at levels of overbought/oversold for far too long and most of the money flow indicators I find worthless, especially On Balance Volume.

I hope that helps.

USO Update

Whether it was the petroleum report or as some are suggesting, margin calls on Italian bonds as the calls go out at the close of the European cash markets (the timing is so similar, it's hard to tell, but the idea is that Italian bonds would be hedged by a short oil position because of the FX correlations which almost makes sense given the nature of the 3C charts, to cover the margin call on the BTPs, they'd need to cover the short in crude), I doubt we'll know, here's the latest update on USO. I still consider < $36.50 to be the line in the sand.

 The 1 min chart continues to deteriorate.

 The 5 min chart had enough time to confirm, it didn't.

And the 10 min chart has barely moved, which makes this move (which was parabolic any way) susceptible to a decent pullback. Broader Equity market risk should have some influence on the situation either way.

USO Update

USO has rallied strongly off the Energy report, breaking all correlations with the stronger $USD. It's a very parabolic rally and it will be interesting to see if it holds, the first sign of a negative divergence has just appeared.